Teething troubles for SA’s new stock exchanges
The move towards greater competition in SA is said to be irreversible, though it is more challenging here than elsewhere
In November 1980, The Washington Post ran an article with the headline, "Electronics Threaten NYSE Monopoly".
The piece detailed how, after two centuries, the New York Stock Exchange’s "ancient monopoly" was crumbling beneath the weight of regulatory change, technology and "old-fashioned competition".
Fast-forward nearly four decades and the JSE finds itself in a similar spot. While it might be a step too far to suggest that the mighty JSE’s monopoly remains anything but a monopoly, SA’s financial markets have undergone an indelible change over the past 18 months.
Thanks to changes to the Financial Markets Act, which have prevented unlicensed companies from trading their shares over the counter (OTC), and a handful of entrepreneurs armed with cutting-edge technology, four new stock exchanges have entered the fray.
Perhaps the only thing more surprising than the onslaught on the bourse’s decades-old dominance is how overdue it is.
But have the new exchanges made any difference at all?
For all the hype that surrounded the arrival of ZAR X, 4 Africa Exchange (4AX), A2X Markets and, most recently, Equity Express Securities Exchange (EESE), very little has changed in the way that the vast majority of South Africans invest their savings.
This is evident in the fact that the total value of trades settled across all four of the new exchanges over the five months to May was little more than R100.6m – a fraction of what the JSE does in a day. By comparison, the value of all equity trades settled over the same period exceeded R2.9 trillion.
ZAR X, which has been running the longest, has listed just three companies since its February 2017 debut.
All three are agricultural co-operatives and trade in the shares of one of those, Senwesbel, is restricted to bona fide farmers.
That Senwesbel has been ZAR X’s most traded stock, according to the exchange’s CEO, Etienne Nel, is hardly encouraging.
Nel — a former stockbroker and the brains behind OTC share trading platform Equity Express — says ZAR X will look to list structured products, such as exchange traded products, preference shares and asset-backed securities. It is also looking at section 12J venture capital companies, those set up in terms of a special dispensation in the Income Tax Act.
Notwithstanding its rather sorry offering, ZAR X accounted for 85% (R86m) of the value of trading on the new exchanges over the year to May.
Evidently, ZAR X and its brothers-in-arms are hardly about to eat the JSE’s lunch.
Still, the incumbent has taken the competition seriously, announcing a tiered billing model that comes into effect at the end of July and will lower trading costs.
The entry of new exchanges is "a bigger change than people think right now in SA", Alasdair Haynes, CEO of pan-European equities trading venue Aquis Exchange, tells the FM. "This is actually about changing capital markets in SA forever."
As the former CEO of Chi-X Europe, Haynes was responsible for growing that business into Europe’s largest equities trading platform before its sale in 2011.
It took Chi-X five years to become profitable, he says, so it’s early days for SA’s newbies. "It took 23 attempts to break the monopoly of the London Stock Exchange," Haynes says.
While Haynes believes the move towards greater competition in SA is "irreversible", he admits that it is somewhat more challenging here than, say, in London, where trading venues such as Aquis do not need permission from companies to list their shares.
Unsurprisingly, Aquis Exchange has more than 1,200 companies listed, including Europe’s largest firms. Less than five years since its launch, Aquis settled trades worth €20.7bn (R321.8bn) in June alone.
Since exchanges in SA cannot unilaterally list the shares of companies already listed on the JSE, they have kept costs for companies seeking listings as low as possible.
A2X, which provides a secondary trading venue for JSE-listed stocks, allows companies to list for free. It makes its money through transaction fees charged to brokers, which were 40% lower than the JSE when it launched.
A2X caters only to institutional investors such as asset managers and pension funds. On that score it is 85 times cheaper than 4AX, which went live at the end of September, based on the comparison of a R5m trade.
Still, despite promising lower trading costs and companies far larger than those listed on its new rivals, A2X settled just R7.2m worth of trades over the five months to May.
Just 43,000 Sanlam shares have changed hands on A2X since the insurance giant joined the trading venue to much fanfare on April 16. This compares with an average daily trade of 5bn-10bn Sanlam shares on the JSE since that date, according to Bloomberg.
This suggests that brokers, some of the largest of which are connected to A2X, are still sending trades to the JSE, where the process of buying and selling shares – particularly large orders for institutional clients – is much easier.
Anchor Securities CEO Rob Turner says the stockbroker, which is connected to ZAR X, has not yet transacted on the exchange because there has been no demand among its private clients for any of the companies listed there.
Liquidity, the ability to buy and sell shares, is also a concern, says Turner. Equally, there are a number of smaller JSE-listed shares that Anchor wouldn’t include in its house-view portfolios because of a lack of liquidity, he says.
Of course, this is a classic chicken-and-egg situation: which comes first, the brokers trading shares or the liquidity enabling them to do so?
Investec Equities head Tinus Rautenbach expects A2X to benefit investors by providing more liquidity, ultimately making the cost of execution lower. He says: "The engagement process with A2X has been seamless and the new exchange has been very responsive in our engagement with it."
A2X CEO Kevin Brady says brokers face inherent infrastructural issues in being able to operate efficiently across multiple trading venues. "Both the front-end trading systems as well as many brokers’ post-trade systems, which are heavily integrated into [the JSE’s system] will take time to re-engineer or replace," he tells the FM.
A2X expects activity to pick up sharply in the next three to six months as brokers upgrade their systems to deal with a multiple market environment, says Brady.
Having listed 10 stocks, including two top 40 companies – Sanlam and property company, Growthpoint – Brady thinks A2X, which launched in October, is close to its tipping point. "Building our profile and educating corporate SA was a lot harder than we expected," he admits.
ZAR X’s Nel and Fay Mukaddam, CEO of 4AX, echo these sentiments.
"You are dealing with systems and organisations which are more comfortable with the way things have always been done. There’s a huge negative orientation one has to work against," says Mukaddam.
4AX, which has listed five companies and has a market cap of about R6.3bn, has fared the worst from a trading point of view, settling just R704,091 worth of trades over the five months to May.
Even EESE, which has only one listing, in the form of Imperial Holdings’ BEE partner, Ukhamba Holdings, managed R6.7m worth of trade over that time – an indication, as with ZAR X’s Senwes, of how actively former OTC shares are traded.
While a number of 4AX’s listings are OTC plays, fast-moving consumer goods company CA Sales Holdings says it listed on 4AX because exchange-control rules prevented it from having a listing only on the Botswana Stock Exchange, where most of its shares trade.
It has no free float on 4AX, but hopes to increase this within two to three years, finance manager Frans Reichert tells the FM.
Similarly, agribusiness Senwes has only about 26% of its shares in free float on ZAR X. Senwes CEO Francois Strydom says the main reason the company listed on ZAR X was to comply with OTC regulation. "It wasn’t to raise paper, manage the share price or increase liquidity," he says.
Mukaddam is at pains to distance 4AX from ZAR X, which she suggests is an "online trading platform with an exchange licence".
"I don’t think we should be compared to ZARX at all, because it assumes a parity which I don’t think exists," she tells the FM.
While it is true that 4AX can dual list stocks and is the only new exchange that has a licence to trade across all asset classes, to be fair to the others, they all had to obtain a stamp of approval from the Financial Sector Conduct Authority.
4AX has nine equity market listings scheduled for this year, two of which have been completed, and plans to launch a debt offering at the end of the year, Mukaddam says.
Brady, meanwhile, says that once A2X has built credibility as a trading venue for secondary listings it will likely look to list new companies.
"Never take your eyes off what the capital markets are for. The purpose of stock exchanges is for companies to raise capital to help the economy grow," says Haynes, who has a relationship with A2X.
Enhanced liquidity in a company’s stock makes it easier to issue shares and raise capital.
SA’s investment community would be foolish not to support new exchanges, he says.
* A previous version of this story cited the incorrect figures for trade in Sanlam shares on A2X and the JSE